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HRM/U4 Topic 1 Introduction to Compensation Management, Components of employee and Executive Compensation

In simple terms, compensation is everything that a company offers its employees in return for their talent and time. When organized the right way, compensation dollars can be strategically leveraged to reduce turnover, boost employee engagement and attract top talent. The purpose of compensation management is to make the most of company dollars in a way that rewards employees for their work.

Compensation management is the act of distributing some type of monetary value to an employee for their work by means of the company’s policy or procedures. In basic terms, it is paying an employee based upon the decided pay and benefit package for the position. The goal of compensation management is to find quality people who perform quality work and then compensate them in order to retain them and reduce turnover rates. Some different types of compensation include salary, overtime pay, commission, bonuses, and benefits packages that might include health and dental insurance, vacation time, and retirement savings.

Importance of Compensation Management

  1. Compensation management makes a company vigilant. It drives managers to be on the look out for star performers who must be given rewards for their efforts, which ultimately decreases the risk of losing a valuable employee.
  2. It is positive reinforcement. Yes, money doesn’t make the world go round and if line managers are not friendly, helpful and supportive retention is difficult. But cash prizes and consistent monetary perks in conjunction with a great work environment allow companies to grow by leaps and bounds through motivated, hard working employees.
  3. Compensation management enhances the company’s reputation. When workers are satisfied with their monetary and intangible rewards, they attract better prospects for vacant positions, bringing new, fresh talent to the organization.

The basic components of employee

Employee compensation and benefits are divided into four basic categories:

  1. Guaranteed pay: A fixed monetary (cash) reward paid by an employer to an employee. The most common form of guaranteed pay is base salary. Guaranteed pay also includes cash allowances (housing allowance, transport allowance, etc.), differentials (shift differentials, holiday differentials) and premiums (overtime, night shift, etc.)
  2. Variable pay: A non-fixed monetary (cash) reward paid by an employer to an employee that is contingent on discretion, performance, or results achieved. The most common forms of variable pay are bonuses and incentives.
  3. Benefits: Programs an employer uses to supplement employees’ compensation, such as paid time off, medical insurance, company car, and more.
  4. Equity: Based compensation – stock or pseudo stock programs an employer uses to provide actual or perceived ownership in the company which ties an employee’s compensation to the long-term success of the company. The most common examples are stock options.

Components Executive Compensation

4 Main Components of Executive’s Compensation

  1. A basic salary

A basic salary this is regarded as a “fixed” element of pay and it does not normally vary in relation to company performance. Since salary establishes the executive’s basic standard of living, it is necessary for both high and low-performing firms to pay at the going market rates.

  1. Short-term incentives

Short-term incentives are generally awarded annually. Award opportunities reflect hierarchical position relationship in most cases with higher opportunities relative to salary for higher-level positions and vice versa.

  1. Long-term incentives

Long-term incentives generally refer to grants or awards where the payment is based on performance for a period beyond one year.

The chief grant types fall into three broad categories-stock-price appreciation grants, restricted stock or cash grants and performance-based grants.

  1. Benefits/Perquisites

The last component of an executive’s total compensation package consists of a wide variety of benefits and perquisites. It is difficult to quantify benefits due to lack of reliability of data. These benefits include company cars, club membership, spouse travel, housing accommodation etc.’

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